How to Research Stocks

Apr 27, 2022


It’s similar to shopping for an automobile. It is possible to base your decision entirely on the technical specs. However, it’s equally important to think about how the car is when driving, the brand’s reputation, and whether the interior color can disguise the dog’s hair.

Investors are a term used to describe this kind of research in stock called Fundamental analysis.

How to Research Stocks

What does this mean? A look at a range of elements like the company’s finances as well as its leadership team and competitors to assess the value of a stock and determine if it is worthy of a space in

Research on stocks: 4 actions to analyze any stock

Before diving into the stock market, stocks are long-term investments because they come with some risk. You’ll need the time to endure any ups and downs and reap the long-term benefits. This means that the best investment is the best choice to save money that you won’t use for at least five years. (Elsewhere, we provide better options for savings in the short term. )


1. Take stock of your research materials

Begin by looking at the financials of the company. This is known as quantitative research. It starts by putting together some of the documents companies must file with authorities in the U.S. Securities and Exchange Commission:

  • Form 10-K: A year-end report containing key accounting statements that have been independently verified. This report provides the balance sheet of your company and its income sources and the way it manages its cash and revenue, and expenses.
  • Form 10Q: Quarterly report on financial and operational results.

Are you short on time? There are highlights from the filings above and other important financial ratios on your brokerage company’s website or major financial news sites. (If you do not have a broker account, here’s how you can create one.) This info will allow you to evaluate a company’s performance against other companies to invest your money.

2. Find your target

The financial reports of these companies contain an abundance of numbers, and it’s easy to become overwhelmed. Concentrate on the following lines of information to gain a better understanding of the inner workings that can be measured in an organization:


Revenue: The amount of money a business took during its creation. It’s the first item you’ll see on your income statement, which is the reason it’s commonly called”the “top report.” In some cases, revenue is divided into two parts “operating income” as well as “nonoperating income.” The operating revenue can be more evident because the core of the business generates it. Nonoperating revenue is typically derived from single-time business operations like selling assets.

Net income: The “bottom line” figure is named because it’s at the bottom of the income statement, the sum of money an organization has earned when operating costs, tax, and depreciation are taken out of the revenue. Revenue is the amount that is equivalent to your salary gross, and net income is equivalent to the remaining amount after you’ve paid your taxes and living expenses.

Earnings as well as earnings per share (EPS): If you Divide earnings in half by the number of shares available for trading in the market, you’ll receive the earnings per share. This is a measure of the company’s profit in a per-share manner, making it easy to gauge the performance of other businesses. If you are presented with earnings per share, you will be accompanied with “(ttm),” which is a reference to the “trailing twelve-month .”

Earnings aren’t an accurate financial indicator since it doesn’t reveal what (or how effectively the business uses its capital. Some companies collect the profits and invest them into the business. Others distribute them to shareholders as dividends.

Price-earnings ratio (P/E) means that you divide the price of a stock’s current value by its earnings/share typically, over the last twelve months — will give the company’s current trailing ratio of P/E. Dividing the stock price by forecasted earnings forecasted by Wall Street analysts gives you the forward P/E. This measurement of a stock’s worth will tell you what investors will be willing to pay for a share for every dollar of the business’s earnings.


Be aware of this: the ratio P/E calculated from the possibly flawed earning per share calculations and analysts’ estimates tend to be focussed on the short-term. This means it’s not a valid standalone measure.

Return on Equity (ROE) as well as return on assets (ROA) The return on equity is a measure, expressed in percentage terms, the amount of profit an organization earns from every dollar that shareholders invest. Equity is the equity of shareholders. Return on assets reveals how much profit the company earns from every dollar it invests. Each figure is calculated by subdividing the year-end net profit by any of the measures. These percentages can also tell you something about how effective the business is in generating profits.

Again, beware of the traps. Companies can artificially boost the return on equity by purchasing back shares to lower shareholders’ equity. In the same way, the taking on of additional debt, like the loans needed to expand the amount of inventory or to finance property, will increase the value of assets that determine the returns on assets.


3. Turn to qualitative research

When quantitative research uncovers the black and white financials of an organization’s tale and qualitative research gives technical details that provide you with more accurate information about its business and potential.

Warren Buffett famously said: “Buy into a company to be a part of it and not for the price to rise.” This is because when you purchase stocks that you buy, you get your own stake in a company.

Here are some of the questions to help you evaluate your business partners who could be potential partners:

What is the way that the company makes profits? Sometimes it’s easy, like the clothing retailer whose primary line of business is the sale of clothes. It’s not always so an obvious thing, like fast-food companies that earn the majority of their income from franchise sales or an electronics company based on providing consumers with funding to grow. A great rule of thumb that has worked for Buffett well is to invest in companies you know and which you can comprehend.

Does this business has a competitive advantage? Find something about the company that is difficult to copy, match or surpass. It could be the branding, its business model, its capacity to invent, its technological capabilities or operational excellence, patent ownership, and superior capacity for distribution, just to mention a few. The more difficult it is for competitors to penetrate the company’s wall more advantageous is the competitive advantage.

How effective is the team of managers? A business is only as strong as its managers, who are able to chart the course and direct the business. You can learn many things about management by reading the company’s annual reports and conference calls. You can also research the company’s board of directors, which is the group that represent shareholders on the boardroom. Be wary of boards composed mostly of insiders from the company. You should have a good number of independent thinkers that can evaluate management’s decisions objectively.

What can go wrong? It’s not about events that could affect the value of the company’s stock in the near term. However, fundamental changes can influence a business’s capacity to expand over a long period. Look for red flags and identify “what would happen” scenarios: A significant patent expires, the successor of the CEO begins to take the company in a new direction, a potential competitor arises, new technology takes over the business’s product or service.

4. Place your research in the context of

As you will observe, there is a myriad of numbers and ratios that investors can utilize to evaluate the financial health of a business and estimate the value intrinsic to its stock. However, focusing solely on the company’s revenues or profits from one year or at the management team’s recent decisions can paint an inaccurate picture.

Before buying any stock, you need to establish a solid account of the company’s history and what makes it worth an ongoing partnership. In order to accomplish this, the context is crucial.

To get a longer-term perspective take a step back from the lens of your study to examine previous information. This will give you a glimpse into the firm’s resilience in difficult times, its responses to challenges, and its ability to increase its performance and provide shareholder value in the long run.

Examine how the company is positioned in the larger picture by comparing the figures and key ratios with the industry standard and other companies that are in the same or similar business. A lot of brokers provide tools for research on their websites. The easiest method to make these comparisons is to use the educational tools offered by your broker, for example, an online screener for stocks. (Learn the basics of using a screener for stocks.) There are several free stock screeners on the internet.